Economic Incentive for Telecom Infrastructure Investment

In his recent State of the Union address, President Obama identified government investment in infrastructure as a key antidote to the U.S. economic doldrums. This is not a new concept. During the Great Depression, the Works Progress Administration spent $7 billion over a three year period to construct buildings, roads, parks, and bridges, bringing short-term jobs and long-term competitive advantage.

Nor is it strictly a U.S. strategy. During the recent downturn, multiple countries have started taking the same tack, but instead of dams and highways, they’re funding telecommunications network infrastructure.

According to a 2009 speech by Taylor Reynolds, an economist with the Organization for Economic Cooperation and Development (OECD), the numbers are impressive for countries both large and small:

Australia

US$32.7 billion

Canada

US$212 million

Finland

US$94.7 million

Germany

US$215 million

Japan

US$28.13 billion

Luxembourg

US$279 million

Portugal

US$71 million

United States

US$7 billion

.

Reynolds gave his presentation at a workshop entitled “Investing in Broadband Infrastructure for Economic Stimulus and Growth.” At the same workshop, organizers cited recent research by the World Bank that finds for every 10 percentage-point increase in the penetration of broadband services, developing countries can see an increase in economic growth of 1.3 percentage points.

Compelling Reasons for Investing

Juan Navas-Sabater, a Senior Telecommunications Specialist for the World Bank, also spoke on the value of broadband investment, citing multiple ways it helps economies recover. He noted that in downturns, entrepreneurship flourishes, pointing to the way South Korea boosted its vaunted broadband infrastructure after the Asian financial crisis in the 1990s, as well as to dot-com success stories, such as Skype.

Navas-Sabater also suggested that telecom infrastructure investment triggers other advantages: competitive pressure on telecom operators brings down the cost of not only consumer devices such as mobile handsets, but also the costs of communication. Major infrastructure investment frequently includes rollouts to rural areas as well, which increases those areas’ chances of sharing in economic recovery.

He also cited statistics from the Communications Workers of America stating that $5 billion in stimulus money would create almost 100,000 new jobs in the short term and almost 2.5 million jobs in the long term.

Part of a Multifaceted Action Plan

Will an economic boost inevitably follow telecom infrastructure investment? It’s not that simple, because such investment doesn’t live in a vacuum. According to a September 2010 report from the U.S. Government Accountability Office (GAO), countries need to follow up investment with other efforts. These efforts include:

establishing plans and policies to guide deployment and provide leadership support

providing government funding through public/private partnerships

promoting competition

implementing strategies to make broadband services more available and useful to consumers

providing digital literacy training and consumer subsidies

partnering with key stakeholders, such as local telecom service providers

Author Thomas Friedman was right: the world is flat, and telecommunications infrastructure is one of the things that’s flattening it. It’s giving developed nations the chance to boost their economies and move ahead, and giving developing nations the opportunity for a stronger competitive advantage. But to get the most out of their efforts, those countries must couple them with rational plans for competition and education.

4 Comments.

The Kenyan government, for example, has invested in the East African Marine System (TEAMS) which is based on the open access concept, as a means of accelerating broadband access and consequently economic development. At official launch TEAMS President Kibaki expressed optimism that a world equipped with I.C.T. and interconnected by fibre-optic cables has much better disaster preparedness and turnaround capabilities than the world of the 1930's during the Great Depression (http://www.statehousekenya.go.ke/news/june09/2009120601.htm)

@Mwende,
Thank you for sharing a link to the TEAMS story. We've previously posted stories about the African undersea cable projects.
Based on the following quote from the story (dated 2009), I'm wondering if there are now some examples of this activity -- "He said under the business process outsourcing, engineering, scientific research, computer programming, accounting, telemarketing and other new global enterprises, can be based anywhere in the world."
Most of the attention, on this topic of business relocation related efforts, tends to focus on ICT work being performed in India and China. Clearly, building new business facilities to attract investment could become a economic development opportunity for African nations, over time.
David

Thank you for the column! The whole concept of investing in and upgrading telecom infrastructure in order to spurn economic recovery and growth appears obvious. As you stated, developing nations can draw a direct relationship between their country's Information and Communications Technology and their per capita GDP. Developed nations also, are seeing a phenomena whereby the exponentially increasing demand for mobile broadband access has long ago outstripped the capacity capabilities of the infrastructure...thereby necessitating significant upgrades and innovation.
Given that, perhaps you can shed some light on the counter intuitive disconnect between the lack of venture capital investment in infrastructure start-ups and their continuing rampant investments in mobile, capacity consuming applications that only exacerbate the crippling infrastructure capacity crunch...which they steadfastly avoid investing in?
All the Best,
Gary

@Gary, thank you for sharing your feedback -- we're glad you found this topic of interest.
Regarding your question about VC investment in infrastructure start-up companies, I believe that there's some willingness to fund innovative new hardware solutions -- but less willingness to fund facilities based service providers. Also, in the wireless sector, VCs are likely cautious due to the unpredictability of technology adoption, given the historical track record.
Case in point: there were high expectations for WiMAX -- the path to that technology introduction was bumpy indeed, see my related commentary. Perhaps there are fewer VCs who believe that they have the required internal expertise to make an informed judgment call -- so that might be the primary reason. Therefore, funding mobile app development, by comparison, may seem less risky.

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